Psychological about-face at odds with job creation

Tuesday

Feb 19, 2013 at 1:00 PMFeb 19, 2013 at 1:12 PM

Robert Samuelson ECONOMIC COMMENTARY

President Obama and Democrats want more jobs. So do Republicans. Heck, everyone does. Yet, job creation is weak. It's true that the economy has generated 5.5 million jobs from its low point. Still, there are 3.2 million fewer jobs now than at the previous high. The official unemployment rate is 7.9 percent, but it would be 14.4 percent if it included part-timers who would like full-time work and discouraged workers who have stopped looking, notes Janet Yellen, vice chairman of the Federal Reserve Board. Scarce jobs are the nation's first, second and third most important economic and social problem.

What's especially disheartening and mystifying is that, until now, job creation was considered an inherent strength of the American economy. Despite some years of recession-induced joblessness, unemployment averaged 5.6 percent from 1950 to 2007. The Congressional Budget Office doesn't expect it to fall below 7.5 percent until 2015. That would make six years above 7.5 percent -- the longest stretch of high joblessness in 70 years.

Something's changed in how the economy works. One theory is "deleveraging": Americans paying down their high debt. The economy won't accelerate until this process is complete, the argument goes; the fact that debt-service ratios have dropped to early-1990s levels is considered a good omen. Another approach is to examine the economy by sectors and see which ones are lagging compared with past recoveries. Yellen did this and indicted housing (its deep slump) and state and local governments (spending cuts). Again, there are said to be encouraging signs. Home construction, prices and sales are up; state and local spending is stabilizing.

This analysis helps but, I think, misses the main story. To overgeneralize slightly: We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not. More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble.

The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (saving as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it's edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy. Businesses have also retreated. They resist approving the next loan, job hire or investment. Since 1959, business investment in factories, offices and equipment has averaged 11 percent of the economy (gross domestic product) and peaked at nearly 13 percent. It's now a shade over 10 percent, reports economist Nigel Gault of IHS Global Insight.

Note that these attitudes govern sectors accounting for roughly four-fifths of the economy: consumer spending is about 70 percent of GDP; business investment is the rest. They dwarf housing construction, about 2.5 percent of GDP. The caution and risk-aversion aren't so great as to cause a recession, but on the margin they have limited the economy's expansion to rates -- lately, 1 percent to 2 percent -- too weak to absorb most jobless. Pessimism produces a sluggish economy; a sluggish economy produces pessimism. That's the main explanation of poor job creation.

As I've written before, this psychological shift stemmed from the fact that the financial crisis and Great Recession were largely unpredicted. Americans aren't just deleveraging. They're also building wealth to protect themselves against unknown dangers. Perhaps the stock market's recent assault on record highs signals restored confidence, but remember: The market is simply regaining levels of late 2007. A report from Credit Suisse argues that returns to stocks will average about 3.5 percent annually (after inflation) in the next 20 years, down sharply from 6 percent since 1950. To compensate for lower returns, companies would need to contribute more to pensions. Wages would suffer. Consumption spending would weaken.

We are hostage to a stubborn, restraining psychology. There's no obvious fix for slow job growth, precisely because it requires a change in public mood or some autonomous source of added demand -- a burst of exports, investment in new technologies -- not easily predicted or controlled. It could happen but is hardly guaranteed. Politics does matter, to a point. Constant budget and tax feuds between the White House and Congress spawn uncertainty and subvert confidence. Obamacare's disincentives to hiring hurt, though how much is unclear. But grandiose solutions, say infrastructure spending, founder on practicality. A meaningful level of projects would take time to start and add excessively to budget deficits. We are waiting and hoping.

Robert Samuelson is a columnist for the Washington Post Writers Group. His weekly column and blog appear online at telegram.com.